IFRS Interpretations Committee

ProjectsWork plan for IFRSsFinancial Instruments: Presentation—Accounting for a financial instrument that is mandatorily convertible into a variable number of shares subject to a cap and a floor

Financial Instruments: Presentation—Accounting for a financial instrument that is mandatorily convertible into a variable number of shares subject to a cap and a floor

Tentative agenda decision

IAS 32 Financial Instruments: Presentation—Accounting for a financial instrument that is mandatorily convertible into a variable number of shares subject to a cap and a floor

The Interpretations Committee was asked how an issuer would account for a particular mandatorily convertible financial instrument.

The submission described a financial instrument that is mandatorily convertible into a variable number of the issuer’s own shares (subject to a cap and a floor on the number of shares to be delivered).

At its January 2014 meeting, the Interpretations Committee noted the following:

The instrument is a non-derivative that meets the definition of a financial liability in paragraph 11(b)(i) of IAS 32 because the issuer has a contractual obligation to deliver a variable number of its own shares.

It is inappropriate to consider that there are separate conversion features for each of the scenarios in which the issuer will deliver a different number of its own shares because the conversion outcomes are mutually exclusive. IAS 32 does not permit an issuer to divide a conversion feature into multiple outcomes in evaluating whether the instrument contains a component that meets the definition of equity.

The cap and the floor are embedded derivatives whose values change in response to the price of the issuer’s share. Assuming that the issuer has not elected to designate the instrument under the fair value option, the issuer must separately account for those embedded derivatives in accordance with IAS 39 or IFRS 9.

In the light of existing IFRS requirements, the Interpretations Committee tentatively decided not to add this issue to its agenda.